Selling Hong Kong’s Stocks at 24,000 Is a Winning Strategy

(Bloomberg) -- A simple strategy for making money out of Hong Kong's volatile stock market in the past six years is holding true -- so far.

Selling shares when the city's benchmark index when it approaches 24,000 and buying when it falls to 20,000 since the start of 2010 would have avoided four plunges of more than 10 percent, and included four rallies of about 20 percent. The Hang Seng Index closed above 24,000 on Sept. 9, a feat it has failed to repeat, and has since fallen more than 5 percent.

As a global financial center with a currency pegged to the greenback and a stock index increasingly weighted toward Chinese state-owned companies, Hong Kong equities are especially vulnerable to external events -- including speculation over U.S. monetary policy, debate over the health of the mainland economy as well as scares such as the European debt crisis. That's helped the Hang Seng Index stay within a range over the past six years, making buying and holding less profitable that for other global benchmarks such as the S&P 500 Index.

The failure of the Hong Kong's key gauge to remain for long above that level makes selling self-fulfilling as investors take profit before 24,000 in anticipation of losses, according to Steven Leung, Hong Kong-based executive director at UOB Kay Hian. He expects the index to eventually clear that level, boosted by mainland buyers.

Hong Kong's equities have become increasingly influenced by the ebb and flow of Chinese funds since the opening of an exchange conduit with Shanghai in 2014. The gauge surged in April last year to reach at seven-year high of about 28,443 after an influx of southbound purchases through the link spurred frenzied trading amid expectations a wall of mainland capital was coming. As a bubble in mainland stocks burst, the inflows turned to outflows, helping drag the Hang Seng Index down 36 percent to a low of about 18,320 in February.

Mainland investors have once again turned off the taps after record equity purchases in September, puzzling analysts. Coupled with a tightening U.S. election race, that's making investors more nervous. The Hang Seng Index fell 0.6 percent to an 12-week low on Thursday in the wake of the biggest net sales through the link since July 2015.

“We're taking a fairly cautious view into year end," said Geoff Lewis, Hong Kong-based senior strategist for Asia at Manulife Asset Management. "You've still got quite a lot of uncertainties."

Economy Boost

Baring Asset Management (Asia) Ltd. says a stabilizing Chinese economy may help tip the Hang Seng Index over 24,000. The nation's official manufacturing gauge rose to the highest in two years last month, led by new orders, while factory-gate prices increased for the first time since 2012.

“The recovery in China has been helpful for Hong Kong," said Khiem Do, Hong Kong-based head of multi-asset strategy at Baring. Depending on the U.S. election outcome, “you should see the Hang Seng continue to rise towards 25,000 or 26,000. A rising stock market tends to pull in the momentum investors," he said.

Analysts are also confident, projecting the city's benchmark index will be at around 25,800 in 12 months' time, according to on Bloomberg calculations using brokerage price targets of members. Their track record has shown them to be overly optimistic, with the consensus target remaining above 24,000 for the past few years.

For now, South China Financial Holdings Ltd. says the tested strategy will still work.

“I suggest my friends and clients to stop buying or take profit at the 24,000 resistance level," said Sam Chi Yung, senior strategist at South China Financial in Hong Kong.

--With assistance from Kyoungwha Kim To contact the reporter on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net. To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sarah McDonald